India, China, And The Oil Markets
by Dr. Joe Duarte
|Tuesday, December 28, 2004
India and China are rapidly becoming major players in oil exploration and the global oil market in general. The rivalry between the two has yet to be acknowledged by the mainstream as a significant factor in the marketplace. At the center of the emerging relationship between the two is the controversial war torn African nation Sudan.
According to the Financial Times: if we were to "Pick almost any unstable part of the world" we would likely "find China and India competing head to head for the rights to explore for oil and gas. But though China has been pursuing overseas energy sources for years, India's emergence is recent.
But even though India is getting a late start, it is aggressively pursuing an expansionary strategy. "During the next few months, India's Oil & Natural Gas Corp., or ONGC, the country's biggest company, will step up its investments in Russia, Sudan, Angola, Vietnam, Myanmar, West Africa and elsewhere."
And as with other industrial powers, India's aggressive behavior in the oil markets, and its expansion "reflects a restless quest for national energy security that will increasingly shape India's diplomacy. ["Energy security is of critical importance to India,"] Manmohan Singh, India's prime minister, said in a recent interview. ["It is second only in our scheme of things to food security."]"
India's expansion is modest for now. According to the Times: "ONGC has invested $3.5 billion in overseas exploration and development since 2000. This is still much smaller than the estimated $40 billion spent by China National Petroleum Corp. But it is a taste of what is growing into a titanic competition between two of the world's most rapidly growing economies."
India's economy has hit critical mass at a difficult time in the equation of supply and demand in the oil markets: "with just over 1 billion people, has 16% of the world's population and just 0.4% of global oil reserves." Meanwhile "average economic growth projected at a minimum of 6% a year in the next two decades, plugging the energy gap is increasingly urgent."
Yet, India is not alone. Indeed, it faces a very challenging situation, with the U.S., Japan, and China competing globally, along with Europe and emerging countries, where oil is crucial to daily survival, if not rapid economic growth. "Unlike the situation with food, of which India is now a net exporter, the energy deficit has worsened sharply since May, when Singh became prime minister. Oil prices have eased in the last three weeks, but India imports more than two-thirds of its consumption, and its demand is expected to triple in the next two decades. ["Whichever way you look at it, India could not possibly meet its energy needs through domestic production,"] said Subir Raha, chairman of ONGC. ["Our only choice is to do what France did in the 1950s or China is doing now, which is to secure our energy sources overseas."]"
Africa And Other Unstable Regions Beckon
With much of the world being locked in to contracts with U.S. and International oil majors, India faces a unique set of problems. It has to go to increasingly dangerous places to find its oil. "Much of India's small but growing overseas aid budget has been spent on African countries, where ONGC and China National Petroleum are in competition for exploration rights. Securing ["equity oil"] in such areas enables ONGC to import it at cost, about $8 to $10 a barrel after royalties and license fees, compared with open-market prices of $40 a barrel or more.
Yet, "the biggest diplomatic challenge is in India's backyard — in the temptations offered by big natural gas reserves in Iran, Myanmar and Bangladesh."
The Times reported: "New Delhi will have to look closely at building a gas pipeline from Iran that would cross neighboring Pakistan. Until recently, that option was unthinkable. But Singh's government has indicated a willingness to discuss it with Islamabad, despite the obvious insurance risks." Citing past history, Indian oil experts told the Times: "All through the worst stages of the cold war, France's pipeline from Siberia was never threatened. Energy cooperation can transcend diplomatic problems."
In other words, citing "a sense of urgency and an awareness that this is a strategic priority," India is chucking caution to the wind, and, while aggressively increasing its domestic search "in the Bay of Bengal on India's east coast and the Bay of Cambay on its west coast– on its northern onshore basins and in an arc from the deserts of Rajasthan across the Gangetic plains to the foothills of the Himalayas," while "showing no hesitation in bidding for exploration blocks in parts of the world that Western energy firms would not touch, such as Sudan, where it is investing $1.5 billion. India is also looking at a gas pipeline from Myanmar."
India is aggressively expanding its global search for oil. But, in doing so it is venturing onto a dangerous global stage where even the most inexperienced participant, China, has developed relationships and staked claims to key territories.
Both China and India are searching for a dwindling, or at least an increasingly difficult to obtain resource in unstable areas of the world where sectarian violence and lawlessness are the rule, not the exception.
The combination of cultural, political, and different stages of experience on the global stage for these two emerging players sets up a unique set of problems for the U.S., Europe, Japan, and Russia.
On the positive end, it does have the potential for a continuing boom to the U.S. oil service sector.
As this dynamic advances, it has the potential of causing one of two things: significant disputes between China and India, or even more dangerous from a political standpoint for the U.S., cooperation.
The creation of a China-India coalition in oil is unlikely. But, if it were to come about, it could create a significant amount of potential surprises for the rest of the world.
Oil Markets: Still In Long Term Up Trend
Oil prices have corrected 25% from their October 2004 lows, but remain in a long term up trend.
Crude futures were stabilizing in pre U.S. trading on 12-28. The chart for February crude has been making lower lows and lower highs since the October top. Support is now near the $40 area. But the 200 day moving average, near $40 has yet to be broken. It is at this chart point that the real battle will be fought.
A break above $48, could take crude prices back to the $50-$52 area.
A sustained break below $40 would signal a likely end to the bull market. The next down leg, if $40 does not hold would be $35-$37.
The Philadelphia Oil Service Index (OSX) is still testing the 125 area, but remained above the 20 and 50 day moving averages. 128 is tough resistance. Volatility will likely increase here in the next few days. For more details on trading the energy sector visit our energy timing page, featuring our highly effective OIH timing model and our Top Ten Energy Stock List.
The Amex Oil Index (XOI) moved back inside the 686-720, pivot band, but also remained above the 50 day moving average, suggesting that prices are getting ready to attempt a move up. For immediate analysis, including stock picks, and the latest in technical analysis of the entire energy complex, our subscriber section has a full complement of recommendations in oil service and the rest of the energy complex.
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